Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year).The company carries average inventory of $750,000.Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days, and it pays on time.The CFO believes he can reduce the average inventory to $647,260 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?
A) $123,630
B) $130,137
C) $136,986
D) $143,836
E) $151,027

Question

Quizplus · Accepted Answer

To meet the goal of reducing the cash conversion cycle by 10 days, the firm must reduce its accounts receivable by $136,986. This calculation involves understanding the components of the cash conversion cycle (inventory conversion period, receivables collection period, and payables deferral period) and how changes in inventory levels and accounts receivable impact the cycle.

Monar Inc'S CFO Would Like to Decrease Its Cash Conversion Cycle